Lancaster Engineering Inc. (LEI) has the following capital structure, which it considers to be optimal:

Debt 25%

Prefered stock 15

Common equity 60 ---- 100%

LEI’s expected net income this year is $34,285,72; its establish dividend payout ratio is 30 percent; its federal-plus-state tax rate is 40%; and investors expect earnings and dividends to grow at a constant rate of 9 percent in the future. LEI paid a dividend of $3.60 per share last year and its stock currently sells at a price of $60 per share.

LEI can obtain new capital in the following ways:

Common: New common stock has a flotation cost of 10% for up to $12,000 of new stock and 20% for all common over $12,000.

Preferred: New preferred stock with a dividend of $11 can be sold to the public at a price of $100 per share. However, flotation costs of $5 per share will be incurred for up to $7,500 of preferred, and flotation costs will rise to $10 per share, or 10%, on all preferred mover to $7,500

Debt: Up to $5,000 of debt can be sold at an interest rate of 12%; debt in the range of $5,001 to $10,000 must carry an interest rate of 14%; and all debt over $10,000 will have an interest rate of 16%.

a) Find the break points in the MCC schedule (gráfica del CCMP)

Utilidades Retenidas | $ 24,000 | PR de Utilidades retenidas | $ 40,000 | PR de AC CON 10% de flotación | $ 60,000 | PR AP 5% de flotación | $ 50,000 | PR Deuda 12% | $ 20,000 | PR Deuda 14% | $ 40,000 |

b) Determine the cost of each capital structure component Utilidades Retenidas | (0-40,000) | | (3.6*1.09)/60 +.09 | 15.54% | Acciones Comunes | (40,001-60,000) | 10%